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Tobacco Economics

I am not an economist, an actuary or an accountant, but I do have a few ideas about the economics of the tobacco industry to share.

When people talk about money and tobacco, the first thing they usually mention is tax revenue. The 2013 US tax revenue from tobacco was over 4 billion dollars ($4,046,700,000 to be exact). At first glance, this seems like a large amount of money.

However, there is a third factor to consider: Cigarette smoking is responsible for more than 480,000 deaths per year in the United States, (including nearly 42,000 deaths resulting from secondhand smoke exposure). On average, smokers die ten years earlier than nonsmokers. The average life expectancy in the USA is 79 years, so smokers should die at 69, on average. The current Social Security Retirement Age is 66, so the average smoker only enjoys three years of retirement while non-smokers have 13 years. The normal social security benefit is $19,212/yr, so 480,000 smokers dying ten years early saves the government 92,218 billion dollars.

So by my crude calculations, the government wins twice, once with tobacco revenue ($4 billion) and again with a reduced need to pay pensions ($92,000 billion) and other benefits to seniors who smoked. The government loses on health care and reduced productivity, but many of these costs are borne by industry, and the government may only have to pay $85 billion in health care costs.

Frankly, I am a bit dubious about my numbers, but fortunately, there have been a couple of European studies of this issue, which show similar trends.

In 2001, the Wall Street Journal published an article about the effect of tobacco on the Czech economy. It stated that the premature death of 23,000 smokers in the Czech Republic saved the government about $(US) 24- 30 million in health care, pensions and housing costs. After taking into account taxes on tobacco, lost income tax through sickness and health care costs the report argued that overall the Czech government benefited by $US 147 million per year.

Czech public finances

The study, which is available online was undertaken by Arthur D Little, a consulting firm, for Philip Morris, which sold 80% of the cigarettes in the Czech Republic at the time. It was intended to reassure the Czech government that cigarettes were not costing the government money. Philip Morris apparently intended to produce similar reports for other governments, but once this report was leaked they shelved the project.

It is hard to know how much faith to put in a study commissioned and financed by a tobacco company. So let’s look at “The net effect of smoking on healthcare and welfare costs“, a Finnish study published in the British Medical Journal in 2012. They studied 1,976 Finnish men aged 54 – 60 for 27 years.

They found that overall smokers had a lower total health care cost over the study period because on average they died 8.6 years earlier.

Finnish healthcare costs

The smokers (green line) have higher health care costs up to their early 70’s, but then many of them die, which reduces their total average health care costs by 4,700 euros per person. On average, each smoker missed out on 7.3 years of pension compared to non-smokers, for a further saving of 126,850 euros in pension. If we assume that 18% of the 5.439 million people living in Finland smokes, this amounts to a government saving of 131 billion euros ( $(US)142 billion). If the same figures applied in the USA, smokers would be saving the government $(US) 5,802 billion by dying earlier.

From a purely financial perspective, the evidence shows that smokers benefit their governments by dying earlier, reducing their overall health costs, and greatly reducing the need to pay them the pensions and other benefits after retirement.

Reducing the death toll from tobacco is a moral cause, not a financial issue.